The race to attract innovation and investment that is being observed in recent years has generated the need for legal reform and introduction of incentives for the promotion of Cyprus as a favorable jurisdiction for this market.
As part of the efforts, the framework of the National Policy Statement for the Enhancement of the Entrepreneurial Ecosystem in Cyprus has amended the Income Tax Law to include certain tax relief provisions for enterprises that have qualified as innovative, and their investors.
In order to qualify as innovative, a small and medium-sized enterprise (SME) must meet the following criteria:
Risk-finance investment is defined as equity and quasi-equity investments, loans including leases, guarantees or a mix thereof, to eligible undertakings for the purposes of making new investments and also includes follow-on investments.
To qualify as innovative, an enterprise should acquire a statement provided by an independent auditor confirming that the research and development expenditure represent at least 10% of its total operating costs -
In the absence of audited financial statements, as is the case with start-ups, the Ministry of Finance approval may be provided on the basis of a business plan, describing the ability to develop new or clearly improved products, services or processes with high technological or industrial risk, which are characterized as innovative in their field.
A business will automatically cease to be considered an innovative SME if, at any time, the total amount of risk finance exceeds €15 million. The innovative SME should not be listed on the Cyprus or any other Stock Exchange.
Both the SME and its investors are eligible for certain deductions. This is in line with the motivation of these incentives, which is essentially to promote Cyprus as an innovation and start-up hub, and encourage investment in these businesses.
Certified innovative SMEs enjoy a corporate tax deduction for scientific research expenditure or R&D expenditure, if incurred for the use and benefit of the business.
Any such expenditure that is of a capital nature may be deducted from taxable income equally in the year incurred and in the following five years (i.e. over a total of six years), unless it falls under an asset class for which a different useful economic life (capital allowance rate) is provided.
In terms of investor incentives, a qualifying investor who makes a risk-finance investment in an innovative SME may deduct the costs of the investment from their taxable income, subject to the following limitations:
This tax incentive takes effect from 1 January 2017. This means that any qualifying investment being made to an innovative company after 1 January 2017 and before 30 June 2024 should be declared by the investor in their Income Tax Statement in that year.
Certain exclusion clauses that may restrict the deductibility of the expense, if the investor does not maintain the investment for a minimum period of three years, or if the tax authorities consider that actions have taken place that exceed the maximum ceilings set by the rules, also apply.
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